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Create a Budget for Savings, not Spending

Monday, January 07, 2019

Amar Pandit, Founder & Chief Happiness Officer,

The LA Times in in 2013 reported that American Sprinter Marion Jones was down to her last $2,000. This was the same athlete who had blazed past her competition at the 2000 Sydney Olympics, winning five medals, the one who graced multiple magazine covers, the one who signed multi-million dollar deals. Despite the sum she earned as a result of her success, by 2007, she had been declared bankrupt. Forced to raise money for sustenance, she was forced to sell off her property.

2017 broke the news that multiple Grand Slam Champion Boris Becker too had met the same fate as Jones. Once estimated to be valued at upwards of 100 million pounds, Becker’s decisions with regards to his money led him to bankruptcy. And this fate isn’t simply reserved for the rich and the famous. Celebrities are set apart simply based on their fame and income pattern but overall, the general population is no less susceptible to such a dire future.

Today’s society is one which presents countless opportunities and varied income levels. With a rise in the average income level, there has been a concurrent change in the lifestyle being led and the cost of goods being consumed. And this is something that is just going to continue happening.

People give in to the impulse of buying something without giving any consideration to what impact such purchases might have on their financial lives. “I enjoy each day to the fullest” or “Planning ahead is not my style” might sound very cool but it represents a rather foolhardy thought process and can prove to be detrimental to an individual’s financial health. Extravagant expenses, no thought for future needs and absolutely no financial planning leads people to towards bankruptcy.

There’s no shortage of riches-to-rags stories and most of them occur due to reasons like:
Faulty business plans
Excessive concentration of assets in one asset class
No written plan for managing money for the future
Inadequate savings to maintain one’s current lifestyle in the future
Purchase of unproductive assets

While there is no formula to create wealth, allocating a savings budget as opposed to a expense budget can go a long way towards creating a corpus for the future or an urgent need.

Thus, the key is never how much you earn, it is how much you manage to save that matters. More importantly, it is what gets put to productive use by investing, post saving that matters. You don’t need to earn in crores to end up as a Crorepati. Diligent savings and planned investments will get you there too.

You can maintain your lifestyle and still manage to save for the future by creating a savings budget as opposed to an expense budget. The reason this works is that while an expense budget might help curb purchases in the short run, but in the long run, people fail to be disciplined enough to stick to an expense budget.

The idea is to set a savings target of 15-20% of one’s gross annual income to deploy it productively in investments, cash, debt, equity or real estate. It is imperative to follow this plan of ‘Pay Your Future Self’ judiciously because it will help maintain lifestyle needs without compromising on your financial health.

Building up a nest egg is just as much, if not more important than making money. Today’s savings and investments will determine what you do tomorrow, and this holds true regardless of whether the corpus grows or shrinks. Avoid giving reasons like “I’ll definitely start saving when I make more money” or “I don’t make enough to save substantially”. Instead, focus on saving, even if the amount seems minuscule. In the future, every rupee will add up to ensure a secure future. So, it’s best to start as early as possible because there’s no wrong time to do the right thing.

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